Well, it’s another one of those studies where the results are hardly surprising but I wonder if the conclusions will lead to any concrete change in policy.  Three highly respected IMF economists have found a correlation between a bank’s poor performance, its risky lending practices and lavish, high dollar lobbying.

This brief explanation of the study from the Guardian should send strong signals to the U.S. Treasury Department, the Fed, and the congressional banking committees but probably won’t change a thing.  Afterall, Obama’s primary financial contributors are the same high spending, low performance, systemically risky institutions.  The Guardian is characterizing the study as “landmark”.  I hardly believe that even the astounding conclusions in this paper are going to lend this administration to bite the hand the perpetually feeds it. As I showed yesterday, Geithner’s programs to beef up big bank balance sheets have led to obscene profits from the House showing its hand before the bets are in.

Powerful American banks spending lavishly on lobbying are more likely to engage in high-risk lending and their shares have performed less well than others, a groundbreaking study by the International Monetary Fund has found.

The in-depth research will prompt calls for a wholesale clean-up of Capitol Hill by the Obama administration. Lobbying by the finance, insurance and real estate (Fire) sector outstrips any other in the US economy.

The study, entitled A Fistful of Dollars: Lobbying and the Financial Crisis, published by the IMF, reveals a stark correlation between lobbying by lenders and high loan-to-income loans.

The paper, written by a trio of high-profile IMF economists, established that firms who spend more on buying access to politicians are more likely to engage in risky securitisation of their loan books, have faster-growing mortgage loan portfolios as well as poorer share performance and larger loan defaults.

You have to love any academic study with a title like A Fistful of Dollars.  Here are some other conclusions.

“Our analysis suggests that the political influence of the financial industry can be a source of systemic risk,” Deniz Igan, Prachi Mishra and Thierry Tressel wrote in their conclusion. “Therefore, it provides some support to the view that the prevention of future crises might require weakening political influence of the financial industry or closer monitoring of lobbying activities to understand better the incentives behind it.”

The study also established that US business spends $4.2bn (£2.6bn) over the four-year election cycle on “targeted political activity”, with Fire firms accounting for 15% of that total – equivalent to $479,500 a firm in 2006. The “lobbying intensity” of the Fire sector also “increased at a much faster pace relative to the average lobbying intensity over 1999-2006″.

Here’s the academic way of stating that using our old friend, Moral Hazard.

Our findings indicate that lobbying is associated ex-ante with more risk-taking and ex-post with worse performance. They are consistent with a moral hazard interpretation whereby lenders engage in risky lending strategies because they expect preferential treatment associated with lobbying.  Such preferential treatment could be a higher probability of being bailed out, potentially under less stringent conditions, in the event of a financial crisis. Another source of moral hazard could be “short-termism”, whereby lenders lobby to create a regulatory environment that allows them exploit short-term gains. Such distortions have been claimed to be related to risk-shifting in financial markets.

That’s essentially a very dry way of saying that the lobbying dollars are used to lower their risk costs by increasing the chance of government subsidies, lowering the costs of regulation, and making the process less translucent thereby making it more difficult for the market to price assets like their stocks and loan-based derivatives.    These banks can increase their risk exposure and engage in riskier behavior without realizing the full costs.  This study is basically an ‘event study’ so it looks at the bank lending and investment profitability before and after (ex-ante, ex post) the event. The activity they believe that will be effected by the event in this study is mortgage lending behavior.  The authors look at the profitability of mortgage lending before and after as well as any activity changes due to the lobbying activities.  They also compare the profitability of lobbying lenders with lenders that do not lobby.

The events are lobbying activities surrounding “issues specifically related to rules and regulations of consumer protection in mortgage lending, underwriting standards, and securities laws”.   Essentially, they find statistically significant differences before and after the lobby activity in profitability and mortgage lending activity. They also find differences between lobbying and nonlobbying banks.  The nonlobbying banks are actually shown to be more profitable as well as more prudent in their lending practices.

Again, from the study the explanation follows.  Also, I bolded the most important conclusion.

We carefully construct a database at the lender level combining information on loan characteristics and lobbying expenditures on laws and regulations related to mortgage lending (such as consumer protection laws) and securitization. We show that lenders that lobby more intensively on these specific issues have (i) more lax lending standards measured by loan-to-income ratio, (ii) greater tendency to securitize, and (iii) faster growing mortgage loan portfolios. Ex post, delinquency rates are higher in areas in which lobbying lenders’mortgage lending grew faster, and, during key events of the crisis, these lenders experienced negative abnormal stock returns. These findings seem to be consistent with a moral hazard interpretation whereby financial intermediaries lobby to obtain private benefits, making loans under less stringent terms. Moral hazard could emerge because they expect to be bailed out when losses amount during a financial crisis or because they privilege short-term gains over long-term profits. With the caveat that overoptimism might also be consistent with some of the findings, our analysis suggests that the political influence of the financial industry can be a source of systemic risk. Therefore, it provides some support to the view that the prevention of future crises might require weakening political influence of the financial industry.

The question then becomes how do you weaken the political influence of the financial industry?  Let me also add this caveat.  How do you do that when the administration you just elected basically is captured by said industry?

I’m back to Bloomberg again and I’m more and more of the opinion that what we need is a shock and awe policy to deal with Wall Street. Perhaps a little windfall bonus tax is in order?  The title is meek compared to the contents of the piece.  It’s called “No Good Deed Goes Unpunished as Banks Seek Profits”.  These aren’t exactly profits in the normal state of any business model I’ve ever seen.

To understand the meaning of no good deed goes unpunished, Treasury Secretary Timothy F. Geithner can look no further than Wall Street where the banks that received the biggest taxpayer bailouts are seeking to reap trading profits from securities rescued by the government.

Only months after it was started, the U.S. program designed to purge debts of no immediate discernable value from the balance sheets of troubled banks has helped transform the frozen debt into a money-maker as the bonds have rallied. Bank of America Corp. and Citigroup Inc., who received 22 percent of the $418.7 billion American taxpayers loaned to troubled financial institutions, boosted holdings on their trading books of home- loan bonds that lack government guarantees while investors were raising cash for the program, according to Federal Reserve data.

Charlotte, North Carolina-based Bank of America along with Citigroup, Morgan Stanley and Goldman Sachs Group Inc., all based in New York, added a combined $3.36 billion of the debt, for which there were few buyers as recently as March, to their short-term trading assets during the third quarter, up 16 percent from the second quarter, the most-recent data show.

Well, isn’t that special?  I wish I had a deal from the government that allowed me to arbitrage my way into a profitable 2009 knowing that all I had to do was act on the daily Treasury double with the winning numbers (given to me by the Treasury)  in hand.  It’s a new game of pass the trash on mortgage back securities, only these time it isn’t just Fannie, Freddie, and AIG that are the recipients cum beneficiaries of taxpayer largess.  Guess where the trash went and guess who got the profit?  And of course, we can all thank Timmy’s-in-the-Well-Again-Geithner.  I’m not sure if this is a program that was uber-effective by naive design or criminal intent.

The Public-Private Investment Program was introduced in March by Geithner as a means of helping struggling banks by reviving the market for unpackaged loans and mortgage securities that aren’t backed by government-supported institutions, such as Fannie Mae or Freddie Mac. Under the program, asset managers were supposed to raise money from investors and, with additional capital and loans from taxpayers, buy as much as $1 trillion in toxic assets from U.S. banks, freeing up money for lending.

It’s “absolutely ridiculous” that banks, which were expected to reduce their holding of such volatile mortgage securities, bought them before the government program was running and may now profit, said Michael Schlachter, managing director of Wilshire Associates, the Santa Monica, California- based investment-consulting firm. “Some of them created this mess, and they are making a killing undoing it.”

Obviously, we’ve so lowered the cost of risk as well as capital at too-big-to-fail firms that they are blatantly reaping profits by repeating the same damned sins of the past. We’re funding them to do it!

To date, funds participating in the program have raised about $6 billion of equity capital from private investors, which the government has matched. The Treasury also provided $12 billion of debt capital, bringing the funds’ purchasing power to $24 billion. Neither the Treasury nor the funds have disclosed how much and what debt has been bought.

Prices for some of the securities that the funds were supposed to buy have almost doubled since March. The rally was fueled in part by traders jumping in before PPIP funds could get off the ground, said Steve Kuhn, who helps oversee about $440 million of mortgage-bond investments for Pine River Capital Management LLC in Minnetonka, Minnesota.

Basically, our Treasury Secretary has caused a rally-cum-asset bubble all over again. They told the Wall Street Banks ahead of time they were about to get a cash influx so, go all in. (Not only did they go all in, but most of them bought these assets from other sources when the announcement was made,held them a bit,  and just waited for the price to rise to pass it on to the FED.  You can see it in their balance sheets.)

“Anytime people know there’s a buyer coming, they position for that, and that’s clearly what happened here,” said Kuhn, who is co-manager of the Nisswa Fixed Income Fund.

The rally was boosted further by investors seeking riskier fixed-income assets to offset record low yields on Treasuries and by the stabilization of the housing market, he said.

Typical prices for the most-senior bonds backed by hybrid Alt-A mortgages stood at about 58 cents on the dollar by mid- December, up from lows of around 35 cents in mid-March, according to Barclays Capital data.

Prices rose as high as 60 cents on the dollar in November. Fixed-rate prime jumbo mortgage securities were at 84 cents, up from 63 cents in March.

Before the credit crisis, senior non-agency home-loan securities didn’t typically trade below 95 cents on the dollar, JPMorgan Chase & Co. data show.

Alt-A loans fall between prime and subprime in terms of projected defaults. Jumbo mortgages are larger than government- supported Fannie Mae and Freddie Mac are allowed to finance.

If you want to see even more of the casino banking (this time with the House showing you where all the aces are) just check out the section on Non Agency Debt and BOA’s Wager then the wonderful heading called Free Money. Then ask yourself, what happens when this house of cards falls with some type of black swan event again?

But right now?  Here’s a ‘money line’ for you.

“Any time the government says, ‘We’re going to buy something in the securities market,’ they’re putting out a sign that says, ‘Free money, come and get it’,” he said.

Remember the big swell I showed you in the Fed’s balance sheet in this thread?  Let me just put that nifty little graphic (from Clusterstock)  up one more time because the Bloomberg article today shows you just where the money went to from this snake that ate the rabbit bulge in Fed holdings of securities. (See “Securities held outright”).  The Fed bought the securities during a market run-up orchestrated by the Treasury and the big banks just supplying their trash as the prices surged.  You can actually read the billions of dollars involved for each of the major players in the Bloomberg article.

The main problem here is rather than just do something directly to get at the bad securities off the market,like a direct buy at a predetermined price ,they pushed it through the market with a pre-annoucement.  That’s like call soo-ee, pig pig, pig, soo-ee!!! and not expecting the pigs to come in and gobble up everything in sight.  But, because it was in the market, rather than a direct buy, the market momentum drove the prices up to levels that would probably have not been seen if the Treasury would have just done the direct buy.

Without the government announcement, the momentum would’ve not been there that drove the prices above what was probably a reasonable market price. So the deal is, this dealt with the problems for the securities market holders but it is far removed from helping the the essential problem which is the raise in defaults and sinking real estate problems.  It helps the banks make profits by getting the trash off of their balance sheet, but doesn’t do anything else. The bad market for the underlying assets is still very much with us.

The Treasury could’ve done this without giving windfall profits to banks. It could’ve also been the market maker for home prices instead.  Oh, and it also means that all those bonuses that will be paid to these guys are based on a trade that ANY one couldn’t have failed at because they were basically told they were going to make money ahead of time.  How is that pay for performance?  A very blind squirrel could’ve found a life time of nuts with a map in braille showing him where all the nuts were buried.  The surprise would’ve been if they hadn’t made those profits.  How does this deserve a performance bonus?  No wonder they were trying to pay the TARP loans back as quickly as possible.  They KNEW they had huge bonuses coming under this deal.  It was just a matter of how much they could drive the prices up that determined the size.  It was a sure thing!

In the Great Depression, the Home Owner’s Loan Corporation (HOLC) was created to deal with stopping the defaults and foreclosures, hence stopping the decline in real estate values.  All the Geithner program does is transfer taxpayer money to bank bottom lines. You can see this happening in the banks’ balance sheets as they moved balances to trading accounts.

The Fed data on bank holdings of mortgage securities don’t distinguish between changes in value from buying or selling and those that result from rising or falling market prices. The higher values at Citigroup and Bank of America reflect in part purchases of non-agency debt, according to people familiar with each bank’s positions.

The value of non-agency debt designated by the four banks as held to maturity or available for sale fell a combined $2.9 billion to $70.8 billion in the third quarter from the previous three months. Under accounting rules, securities in these categories are usually held for longer than those designated as trading investments, helping to avoid writedowns. Debt available for sale can be sold more easily at a later stage than notes held to maturity.

So, essentially, the Government became the market maker for these bonds and really didn’t establish a top price for them.  They let the bankers do what they will just to pull the stuff off their balance sheets. (Actually, every one else’s balance sheets too, because the soaked up the bonds at the low prices at the announcement day to turn around and sell them back when the government was buying at peak prices.)  This market’s prices don’t reflect anything a rational, efficient market would do. It reflects gaming pure and simple. What’s most outrageous, is this was done with the very same taxpayer’s money who are not seeing similar ‘propping up’ of market prices by the Treasury for the home or business real estate values. It distinctly props up on set of financial interests, the huge Wall Street Banks.

I wish I could say I was shocked and appalled but I’m not.  Again, I only wish some Congress Critter would go get these profits with some shock and awe windfall tax policy.

Yup.  You read that right. U.S. Senators John McCain and Maria Cantwell have filed a bill that would essentially re-instate Glass-Steagall. While the Department of Treasury has officially been nicknamed Government Sachs by Mother Jones and the White House’s attempts at moving beyond partisanship have failed miserably and undermined most of the bills it’s passed, we have a bi-partisan proposal to deal with one huge mess.  Better yet, this proposal is a mere one page long proving that it doesn’t take thousands of pages written by corporate lobbyists and pork seeking congress critters to bring about change.  Here’s the coverage at Bloomberg.com.

A one-page proposal gaining traction in Congress could turn back the clock on Wall Street 10 years, forcing the breakup of banks, including Citigroup Inc.

Lawmakers in both parties, seeking to prevent future financial crises while soothing public anger over bailouts and bonuses, are turning to an approach that’s both simple and transformative: re-imposing sections of the 1933 Glass-Steagall Act that separated commercial and investment banking.

Those walls came down with passage of the Gramm-Leach- Biley Act of 1999. A proposal to reconstruct them, made by U.S. Senators John McCain and Maria Cantwell on Dec. 16, would prevent deposit-taking banks from underwriting securities, engaging in proprietary trading, selling insurance or owning retail brokerages. The bill could also force the unwinding of deals consummated during the financial crisis, including Bank of America Corp.’s acquisition of Merrill Lynch & Co.

“The impact on Wall Street would be severe,” Wayne Abernathy, an executive vice president at the American Bankers Association, said in a telephone interview.

You know what Mr. Abernathy?  Good!!!  It needs to be severe.  Take a look at this paragraph that I’ve highlighted for my own pleasure and your benefit.  Is McCain doing a Teddy Roosevelt while Obama falls short of Franklin?

Resurrecting Glass-Steagall goes beyond the array of new regulatory powers that President Barack Obama has proposed to fix the financial system. It has also sparked debate among academics, regulators and legislators over whether the Depression-era law could have prevented the crisis of 2008 or might help avoid future ones.

There is a companion bill that’s been introduced in the U.S. House of Representatives by Maurice Hinchey, a Democrat from New York.  So far, Senator Dodd and Representative Frank have yet to get on board as the heads of the Banking Committees that would have jurisdiction over the legislation.

One of the headlines buried in the text is this gem which came up from the group of folks put together by then President Elect Obama to propose solutions to the banking and financial crisis.  Notice, that it’s John McCain that picked up the idea and not now President Barrack Obama.  That’s probably because every possible shadow banking/investment banking insider that’s no longer with Goldman Sachs is now in the Treasury Department.

Splitting banking functions needed for the smooth operation of the economy from riskier securities and trading activities was proposed earlier this year by the Group of Thirty, a nonprofit organization made up of former government officials and bankers, including Paul Volcker, a former Fed chairman and head of the president’s Economic Recovery Advisory Board.

The group said the crisis spread like a contagion from firm to firm, putting both commercial banks and securities companies at risk. To prevent a domino effect, systemically important financial institutions shouldn’t be allowed to engage in proprietary trading that involved “particularly high risks” or “serious conflicts of interest,” the group said.

If you haven’t read the interests in the West Wing peddling shadow banking influences, please check out Mother Jones here with an update scheduled in the newest edition here called Fox Meet Henhouse.

What an interesting turn of events.

The evidence on failure of banks to use their taxpayer bailouts to help their communities is mounting. To no one’s surprise, outside of the White House, the Obama administrations mortgage modification program is failing to stop foreclosures.  The program was designed specifically to deal with exotic mortgages last year while a lot of the problems now have to do with joblessness, underwater mortgages, and a myriad of other problems including the still toxic securitization process.  One of the big problems is the excessive fees that are being attached to the modification process.  This seems almost a no-brainer.  If you can’t make your most basic monthly payment, you’re probably in no condition to pay fees, points, or other costs surrounding the modification process. There are two really good discussions about the challenges.  The basics were outlined in this NY Times article by Peter Goodman. Additional analysis can be found at Naked Capitalism by Yves. Some of the shocking data is printed over at Bloomberg.

More than 650,994 loan revisions had been started through the Obama administration’s Home Affordable Modification Program as of last month, from about 487,081 as of September, according to the Treasury. None of the trial modifications through October had been converted to permanent repayment plans, the Treasury data showed. That failure is getting the administration’s attention.

Here’s the NY TIme’s estimates of the modifications that have been put in limbo in the category of temporary and not permanent modification.  This limbo is really its own hell realm because the borrower will keep paying what they can on an underwater mortgage that they might otherwise walk out on.  Guess who wins on that deal?

Last month, an oversight panel created by Congress reported that fewer than 2,000 of the 500,000 loan modifications then in progress had become permanent under Making Home Affordable. When the Treasury releases new numbers next month, it is expected to report a disappointingly small number of permanent loan modifications, with estimates in the tens of thousands out of the more than 650,000 borrowers now in the program.

More unsatisfactory data is likely to intensify pressures on the Obama administration to mount a more muscular effort to stem foreclosures beyond the Treasury’s campaign this week. Populist anger has been fanned by a growing perception that the Treasury has lavished generous bailouts on Wall Street institutions while neglecting ordinary homeowners — this, in the midst of double-digit unemployment, which is daily sending more households into delinquency.

“I’ve been very frustrated by the pace of the program,” said Senator Jeff Merkley, an Oregon Democrat who sits on the Senate Banking Committee. “Very few people have emerged from the trial period.”

The problem here is still the same problem we’ve had for years now and that is the securitization process has not been scrutinized and regulated into some systemic change. Yves does a good job explaining this by delving into statements made by FASB Chairman Robert Herz.

Now there may be remedies to prevent this sort of problem from occurring in the future, but that does nothing to solve the wee mess we have now. Residential real estate prices are sufficiently under water in a most markets that for a viable borrower (meaning one who still has a steady source of income), a deep mod can be a win/win. And before readers get moralistic, this isn’t charity, it’s practicality. In real estate downturns in the stone ages when banks held mortgages on their balance sheets, banks routinely did mods. And even in our current environment of more highly levered consumers, this practice has some empirical support. Wilbur Ross, vulture investor (ie, not predisposed to be a friend of the little guy) is an advocate of deep principal reductions based on his success with them as the owner of the biggest third-party mortgage servicer.

Now it was pretty obvious that the Obama mortgage mod effort would not produce much in the way of results. First, it provided subsidies to servicers, but much less than they would make from foreclosing. That means the banks have every reason to use the Treasury initiative to amass a track record that mods do not succeed (independent of whether they might succeed, as Wilbur Ross has shown they can).

Second, the program offered only a five year payment reduction program, with the lender then able to step up the interest payments to the fixed rates in effect at the time the sorta-mod was entered into. That does not do enough for the borrower. the redefault rate on mortgage mods that do not have significant principal reduction in the first six months now is high. When the initiative was announced, he New York Times reports that payment reductions are expected to be “hundreds of dollars” a month. Is that really going to make a difference with most borrowers, particularly since the interest portion is tax deductible and these mortgages are recent (ie, the interest component is a high proportion of the total payment).

Moreover, if a homeowner has negative equity, he still faces a big bill when he sells the house. What incentive does he have to work to keep current on the mortgage, or to invest in the house?

I think it’s pretty obvious that all of these programs were designed with the banks and mortgage brokers in mind and not the folks in the houses.  The focus continues to be on “incentivizing” the lenders with goodies to force them to do the right thing.  Even after all the infusions of what is basically tax payer money and not privately raised capital or debt, the administration keeps talking about public/private partnerships to help homeowners but the results keep benefiting the banks.  This is outrageous.  Because of this, we have this result as published in the NY Times article.

Though the administration’s program was initially proclaimed as a means of sparing three to four million households from foreclosure, “they’re going to be lucky if they save one or one-and-a-half million,” said Edward Pinto, a consultant to the real estate finance industry who served as chief credit officer to the government-backed mortgage company Fannie Mae in the late 1980s.

Here’s one of the bigger systemic problems that has yet to be solved.

But the mortgage companies that collect payments from homeowners — servicers, as they are known — generally do not own the loans. Rather, they collect fees from investors that actually own mortgages, and their fees often increase the longer a borrower remains in delinquency.

This is another bad result from the securitization process and the lack of a buy and hold strategy that should’ve come as a string attached to the taxpayer funds.  Many of the troubled banks have taxpayer money but no impetus (read TEETH in their collective asses) to do anything other than maintain the status quo.  The regulations and incentives being suggested now are so lax they amount to little more than a nudge.

I have to give the last word on this to Yves since she actually puts the hammer to the nail.  The administration seems to think that wagging fingers and giving them a few bits of candy is going to solve the problem.  Well, according to the statistics, it hasn’t worked to date, so why expect anything to change just by repeating the same strategy louder?

Shaming bankers? What planet is Barr from? The industry is systematically predatory. If they had any concern about public opinion, they’d have used the Bush and Obama efforts as cover to try pushing back against investors in securitization vehicles. Before some of you go on about sanctity of contract, the father of mortgage backed securities, Lew Ranieri, seemed genuinely shocked in the Milken conference in 2008 when other participants said mods were restricted or prohibited in many securitization contracts. Ranieri said they did them routinely. Not only has the industry done anything more than go through the motions, one has to wonder whether they influenced Treasury in the design of the program so as to assure it would not be effective.

My bottom line on this is that there appears to be too many folks in the White House (including LA LA Summers and Timmy-in-the-well-again Geithner ) with connections to the very people requiring a public beating and regulation.  We need some folks doing economic policy that come from successful businesses for a change.  And NO talk of Jamie Dimon, please.

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Ever worked for one of those places that has a petty cash fund that management just can’t seem to keep it’s fingers out of?  You know, the one that’s supposed to buy a few various sundries like postage stamps and turns into a sushi and martini account?  Well, check this out out the Financial Times.  (Once again, we have to go out of the U.S. to get the bottom line.)  It’s called  U.S. Treasury eager to extend Tarp into next year.  Okay, the bold is mine.  Timmy’s in the Well Again and he just can’t get up.

The Obama administration is leaning towards extending the troubled asset relief programme into next year, retaining part of the $700bn war chest in case of another financial emergency.

Although no final decision has been made, officials in the Treasury are wary of letting the fund expire as scheduled at the end of the year and are seeking to allay criticisms and fears about the future use of Tarp, which has been tapped to provide capital injections in a variety of companies from Citigroup to General Motors.

The financial system has stabilised since Tarp was first used last year and banks such as Goldman Sachs and JPMorgan Chase have repaid the government.

I’m not the only one appalled by the audacity giving these folks any more money without strings.  Yves at Naked Capitalism calls it a “slush fund” that contains  “A $2 billion sop to the peasants? How thoughtful. But I am under the impression that the norms for tithing are more like 10%, so this little gesture is more than an order of magnitude too low.”  This comment comes due to one little bit of largesse that might come from Barney the Congressman.  I guess they think if a little falls out of their big ol’  pockets we’ll be less like to moan about the fleecing.

Barney Frank, chairman of the House financial services committee, has introduced a bill that would force the Treasury to transfer $2bn of Tarp and dividends paid by Tarp recipients into programmes for emergency mortgage relief and the redevelopment of foreclosed homes.

Republicans are being less charitable.

He [Jeb Hensarling, a Republican member of the House financial services committee and of the congressional oversight panel that scrutinises Tarp] said he had always doubted that the administration would give up its “$700bn of walking around money” and that he would keep calling for the programme to be wound down.

While the Treasury continues to hedge its bets, there is no doubt among many Democrats that the fund’s extension is an obvious move. “Of course it’s going to be extended,” said one Democratic aide

Clusterstock warns us to “get your checkbooks out; it’s going to be a long haul”.

I just wonder who is paying so who can play? It’s pretty obvious that the money is not going to small or even large businesses in the form of loans.  Most of the banks have terms on their credit cards that would make a loan shark blush.  How many more banks can you really allow to merge and acquire before the justice department is compelled to take action?  I mean the four factor concentration ratios in the industry would make a Reagan era regulator blush.  Right now, it’s just another little pot ‘o cash for some hot arbitrage action.  I wonder who’ll get the political donations next year from these happy Tarp recipients.  Any guesses?

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I’ve said this before, but it bears repeating.  Monopoly power and rent-seeking behavior are anathema to market systems. Politics should stay out of economic decisions and government should provide the framework that makes the market honest, transparent, and open to all interests.  Republican and Democratic pols need to go back to Principles of Microeconomics classes and learn their market structures because protecting a market where there is already intense concentration without additional transparency and regulation is a recipe for disaster.   David Kay, in a column at the FT,and Mark Thoma  of Economist’s View raise the generic  issue again. I’m all for them.  I’m looking at it from the eyes of a financial economist however on the advent of new financial regulation. The rent-seeking has gotten so bad there that they’ve sent Fed Chair Ben Bernanke back to school for a lesson on politics.

Let’s start, like any good lesson, from the theory.

This is from David Kay.

Control of rent-seeking requires decentralisation of economic power. These policies involve limits on the economic role of the state; constraints on the concentration of economic power in large business; constant vigilance at the boundaries between government and industry; and a mixture of external supervision and internal norms to limit the capacity of greedy individuals in large organisations to grab corporate rents for themselves. Vigorous pursuit of these is the difference between a competitive market economy and a laisser-faire regime, and it is a large difference. …

[T]he scale of corporate rent-seeking activities by business and personal rent-seeking by senior individuals in business and finance has increased sharply.The outcomes can be seen in the growth of Capitol Hill lobbying and the crowded restaurants of Brussels; in the structure of industries such as pharmaceuticals, media, defence equipment and, of course, financial services; and in the explosion of executive remuneration.Because innovation is dependent on new entry it is essential to resist concentration of economic power. A stance which is pro-business must be distinguished from a stance which is pro-market. In the two decades since the fall of the Berlin Wall, that distinction has not been appreciated well enough. … The essence of a free market economy is not that the government does not control it. It is that nobody does.

Mark Thoma had some additional analysis.

Free markets – where free simply means minimal government involvement – are not necessarily the same as competitive markets. There is nothing that says what many interpret as freeing markets – lifting all government restrictions – will give us competitive markets, not at all. Government regulation (as well as laws, social norms, etc.) is often necessary to help markets approach competitive ideals. Environmental restrictions that force producers to internalize all costs of production make markets work better, not worse. Rules that require full disclosure, or that impose accounting standards help to prevent asymmetric information improve market outcomes. Breaking up firms that are too large prevents exploitation of monopoly power (or prevents them from becoming “too large to fail”) which can distort resource flows and distort the distribution of income. Making sure that labor negotiations between workers and firms are on an equal footing doesn’t move markets away from an optimal outcome, just the opposite, it helps to move us toward the efficient, competitive ideal, and it helps to ensure that labor is rewarded according to its productivity (unlike in recent years where real wages have lagged behind). There is example after example where government involvement of some sort helps to ensure markets work better by making sure they are as competitive as possible.

Thoma’s comments are pure economics professor.  Market failure is not always the result of government overregulation, taxation, and all those nasty things that Voo Doo economics assumes. Yes, ghost of  Ronnie, government can be the friend of the market and is not always the problem.  Market failure can come from market concentration and lack of transparency as well as two frictions I’ve harped on continually.  That would be hidden information and other forms of information asymmetry that create markets characterized by malfeasance by agents.

Government can be an important actor in smoothing out the glitches that arise from many of sources of frictions.  We have laws that have been in place for many years to do just that.  One of the oldest and most potent is enforcment ofthe Sherman Anti-trust act which seems to have all but been taken off the list of the Attorney General’s priorities. So much systemic risk these days in the financial markets is coming from the intertwining of huge operators that simply busting up the biggest operators into regional players would make sense on so many levels.

This especially applies to the Financial sector as it exists now.

Complete misunderstanding of the Federal Reserve and an inability to keep their hands off yet another area where politics should be kept to a minimal has me supremely worried.  Senator Dodd, holder of a mortgage granted under special consideration and asleep at the wheel over the last few years while Wall Street arbitraged its way to a financial crisis, just put forward an act to consolidate a fiefdom for the Banking Committee he chairs.  It has some lofty goals that look like they’re trying to solve the problems of a concentrated, barrier filled market with a need for additional regulation and transparency.  However, it appears to be  layered within an uberagency that looks way to vulnerable to the political.

On Tuesday, a new threat opened up: Senator Christopher J. Dodd, chairman of the Senate Banking Committee, declared that the Fed had been an “abysmal failure” at regulation. He introduced a bill that would strip virtually all of its power to regulate banks, including financial institution considered too big to fail.

There will be a fight. Mr. Bernanke and the Fed has powerful political supporters, from lawmakers like Mr. Frank and President Obama. But the Fed chairman is being forced to nurture those ties as never before and to carefully map out which battles are worth fighting.

“Ben Bernanke turns out to have better political instincts than anybody thought,” Mr. Frank said in an interview last week. “They accept the fact that I know what I’m doing up here.”

On one front, the Fed faces populist anger from both left-wing Democrats and right-wing Republicans about its power and secrecy. At the same time, officials are locked in brutal but arcane battles about who should oversee Wall Street and big banks as Congress tries to pass a sweeping overhaul of financial regulation.

Congress, ever the finger-pointer, will find the Fed a convenient scape goat.  That is not to say that the Central Bank has not been without its issues.  It is to say that introduction of congress, its land-o-lawyers and pols, and its inability to just say not to lobbyists (rent-seekers) will not make the Fed more efficient.   Dodd is likely to find an ally in the usual bunch of daft, conspiratorial-bent Republicans.  This quote from the NY times article is mind blowing and a pretty good example of the wholesale ignorance of economics rampant in Washington DC these days.

Senator Jim DeMint, a conservative Republican from South Carolina, denounced the Fed on the Senate floor in July as an “unelected central bank” that enjoyed a “monopoly over the flow of our money” and operated in “almost complete secrecy.”

Jim DeMint obviously needs to go back to school for a Monetary Policy class.  Nearly every one of these statements is either blatantly wrong or completely misconstrues the role and charter of the Fed.  The Fed is not captured by Wall Street.  The Congress is, however, and injecting any of these fools into exchange rate or monetary policy would likely finish off our economy in no time.  Remember, these are the fools that encouraged deregulation of ‘financial innovations’ to begin with.

Here’s the Naked Capitalism short version of the Dodd bill that does contain a lot of good things if they manage to get past K Street.  The purpose of the bill is to supposedly rein in Wall Street and prevent another financial crisis.  These are both good goals.  However, I worry about the creation of this superagency called  the Financial Institutions Regulatory Administration which itself looks like its so big it’s bound to fail and likely to be subjected to the whims of the regulated as well as Congress.  My other question is that if all these other financial institutions are to be brought under this UBERregulator, why have insurance companies been left to the Treasury?  That seems REALLY odd since most insurance companies are now entrusted with a huge number of pension funds so they might as well be considered pseud0-fiduciary institutions.  It just doesn’t make sense to me to drop them there unless there’s something political issue I’m not seeing.

The actual details of the bill, in terms of what they give to the Fed and what they give to the SEC seems about right.  There’s a comprehensive wish list of all kinds of wonderful things that I doubt will actually make it passed the ABA and the Vampire Squid interests, but they can try.  Again, the main problem right now is the heavy concentration, which could be taken care of with enforcement of anti-trust regulation, and the lack of regulation over the Shadow Banking Industry which can be handled by laws granting powers to the SEC.  I just see this bill which is now over 1000 pages long and hasn’t really hit the majority of interests yet as way too much to really accomplish the important things and too widespread to be effective.  It centralizes way too much power into, guess where, the banking committees in congress which really haven’t done a bang up job to date and are way too swayed by their political contributors.  Again, much better to beef up the agencies we have with good transparency and use the monopoly laws we already have on the books than create an entire set of rules and regulations that are going to have to be completely re-worked, re-tooled, and re-fought through the courts.

There are basically two huge goals we should have at this point.  The first is get rid of too big to fail. We don’t need any more  oligopolies in this country.  The second is to better regulate the shadow banking industry and the nonbank banks.  It’s not checking and savings accounts that have problems, it’s the ‘financial innovations’.  This thing seems to be a shot gun approach when a few good snipers are necessary and only seems to extend power into the hands of congressional pols.  But, I’m going to keep an eye on it, believe me and I’m going to take up some virtual ink once I dive into more details.  The Health Plan may have been beyond me, but this thing shouldn’t be at all, so if I can make it through the legalese , I’ll try to keep you up to speed before we’re further indentured to Goldman Sachs and Chase.

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In what is undoubtedly good news, the US Bureau of Economic Analysis (Dept. of Commerce) has announced that  REAL GDP grew by approximately 3.5% in the third quarter of 2009.  That is up from the second quarter growth of .7%.  It appears that the economy may be rebounding from the so-called “Great Recession”.  However, as with everything, the devil is in the details and the details show that this occurred because of government support.  This will be good news for those folks that supported the Stimulus Plan.  Details underlying the growth still show that the private sector, however, has yet to pick up slack.  This means the growth has not worked its way through the economy in a way that makes it firmly sustainable.  The increase in Consumer spending seem rooted firmly in the cash-for-clunkers program as well as the tax credits to first time home buyers.  These programs have ended so now we have to look for sustainable consumer spending in areas not financially supported by government programs.

Policy makers will now focus on whether the recovery, supported by federal assistance to the housing and auto industries, can be sustained into 2010 and generate jobs. The record $1.4 trillion budget deficit limits President Barack Obama’s options for more aid, while Federal Reserve officials try to convince investors that the central bank will exit emergency programs in time to prevent a pickup in inflation.

“A lot of this is thanks to government support,” Kathleen Stephansen, chief economist at Aladdin Capital Holdings LLC in Stamford, Connecticut, said in an interview on Bloomberg Television. “The consumer, in fact private demand in general, is not ready yet to pick up the growth baton from the government.”

There has yet to be any signs that improvements will be permanent.  The Labor Market, traditionally sticky, has yet to turn around in a fundamentally good way.

A report from the Labor Department showed 530,000 workers filed claims for jobless benefits last week, more than anticipated and signaling the job market is slow to heal even as growth picks up.

There is an extremely good piece over at Naked Capitalism that explains the situation right now called “The choice is between increasing or decreasing aggregate demand” written by Edward Harrison of Credit Writedowns.

(It’s a bit wonky so be forwarned.)

As I see it, the issue we are debating has to do with how the government responds when large debts in the private sector constrain demand for credit in the face of a severe economic shock and fall in aggregate demand. In short, if private sector debt levels are so high that a recession precipitates private sector credit revulsion, how should government respond?

This is a good question as it gets to the heart of what to do next if you’re the government and it reflects reality on the ground which are the constraints facing the economy due to continuing credit market problems.  The one thing that the discussion fails to address is the fact that quantitative easing by the Fed is not feeding into the credit markets as much as it appears to be feeding a bubble on Wall Street eagerly supported by the Great Vampire Squid and other enemies spawning in the unfathomable deep.  The article focuses on the paradox of thrift and the question “Do we really want the private sector to save at the moment?”

The deal is, we’ve plenty of money circulating through the financial markets at the moment because of actions by the FOMC and of course, the Treasury.  The problem is where it’s going.  Easy money is financing merger activities and arbitrage rather than underlying investment that promotes long run economic growth.  This is the same bubble-producing activity that brings us to no good ends.  We really don’t need savings as much to fund business as much as we need business to feel like it can make commitments to job-producing, goods and servicing producing capital investments funded by the financial sector that should be forced to stop its casino banking activities. If anything, we need savers to step up and buy government debt, sort’ve an any bonds today movement to stop our reliance on foreign sources and free ourselves of obligations to human rights violators like the Chinese and Saudis.

This comes back to the policies of Geithner and the necessary Fed butt kicking that should go along with the cheap tax payer funds.  Let’s just look at the most recent example where the Funds are coming but I doubt they’ll be accompanied with an agreement with teeth.  We’re basically nationalizing another finance sector behemoth GMAC.  Here’s the news from the FT of England. (Funny how I always have to go abroad to get the bottom line on these big taxpayer-funded wall street welfare deals, isn’t it?)

GMAC, the car financing company, is set to receive up to $5.6bn in a new capital injection from the Treasury, filling a hole identified in the “stress tests” earlier this year and paving the way for the government to become the majority shareholder.

The company, formerly the financing arm of General Motors, was one of 19 institutions to submit to a capital adequacy programme led by the Federal Reserve and completed in May. That determined that GMAC had a shortfall, which will now be provided by the government in the form of preferred equity, according to two people familiar with the situation.

Companies receiving huge injections like this should be prepared for more than just a government partner and taxpayer funds.  Funds should come with HUGE strings attached and not just restraints on executive pay.  We should not be financing M&A activity or arbitrage profits.  We need these funds to go where they will create long term REAL value.  Geithner keeps giving these guys they keys to our cars without any parental instructions. We already know they’ve crashed the car a few times.  Why aren’t we providing the guidance and ground rules to prevent another disaster?  We are we perpetuating the conditions that led to failure the first time out?

Oh, and this is an even more interesting question … now that we’re heavily subsidizing parts of our economy will our trading partners and debt holders continue to smile and hold the bag? Another eye opener from the FT.

China is preparing to launch a trade investigation into whether US carmakers are being unfairly subsidised by the US government, according to people familiar with the matter.

The move comes at a time of heightened trade tensions between the two countries after the US imposed duties on Chinese tyres last month. Many warned this would prompt Beijing to retaliate.

Few vehicles are actually exported from the US to China, but the move would have symbolic power by turning the tables on Washington.

US labour groups have long accused Beijing of unfairly subsidising its exporters. However, through a “countervailing duties” investigation, China would assess whether the US was open to the same charge. The investigation could lead to import duties.

Every one seems to recognize that the Treasury is setting up a system of monopolies that are not healthy for the long term prospects of our economy.  Without the systemic changes I harp on continually, we’re bound to get some improvement in the big names, while the underlying fundamentals will belie real change.  Is this the game plan?  Make the big picture look good while setting up the same house of cards while no one is looking?  Economic policy as slight of hand?

Here’s where the smart people are seeing the need to change the system that’s currently under construction by the Treasury Department and the administration economic wonks.

Key officials and lawmakers are reaching a “growing consensus” on the need for a strong mechanism that would allow the government to dismantle troubled financial giants, the chairwoman of the Federal Deposit Insurance Corporation said on Monday.

Sheila C. Bair said administration officials, top bank regulators and lawmakers all agreed that so-called resolution authority needed to be a priority so financial firms do not take on excessive risk, thinking the government will save them, Reuters reported.

“We need to end ‘too big to fail,’ ” Ms. Bair said in remarks to the American Bankers Association annual convention.

The Obama administration plans to send new language to lawmakers shortly on resolution authority, which is seen as a potential deterrent to banks growing too big and complex.

So, the law is in the works, but will it be the usual symbolic effort with no real teeth to it?

The new draft bill is expected to take a tougher stance toward troubled financial firms than the administration’s original plan, and may remove some language that would allow for temporary bailouts.

The strategy would make it easier for the government to oust managers, wipe out shareholders and restructure the firm’s outstanding loans, an administration official said.

Ms. Bair also said she wanted bank regulators to have input in the proposed Consumer Financial Protection Agency, which would have broad power to protect consumers from risky financial products like high-interest mortgages and credit cards with excessive fees.

“I’m hoping that bank regulators can have some say in those rules,” Ms. Bair said.

The C.F.P.A., as proposed, would have the power to write and enforce rules for both banks and nonbanks that provide financial services. It would strip the current bank regulators of their consumer protection roles, which Ms. Bair has opposed.

We need to watch this proposal carefully and ensure that when the sausage gets made, it’s the pigs that go into the ingredients and not the taxpayers and consumers.

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There really isn’t much to being a banker.  It’s boring and not too difficult.  Basically, you take in deposits and safekeep them for a saver.  You keep a portion to cover any possible withdrawals.  The rest you lend out to some one at a reasonable rate of interest.   That rate needs to cover the rate you pay to your saver, your meager costs, and whatever potential risk may exist in the loan.  You watch the loan repay and you give the saver the occasional blanket or toaster for keeping their holiday fund, their pension fund, and their rainy day fund safely in your bank.  It isn’t a very glamorous business model, but it’s a very necessary one.  People’s savings turn into loans for businesses and that’s what makes an economy expand and create jobs.

The key is to be boring and to do this in perpetuity so as to gain the public trust.  Life as a banker is pretty good.  You get to wear boring blue Brooks Brothers suits and you play golf with your local Fed officer for the ABA league.  Your loans go to your friends that own businesses in your town.  These are also the same folks you play golf with at the club on your off days.  You give those same small business owners their home loans and any loans they may need to send their children off to university.  You know which one of your customers has a good business going, whose business is dicey, and who is about to go under.  You know who is keeping up their house or improving it.  You know what everything is worth because it surrounds you, so you know how much to lend on it and at what rate of risk.  Sounds simple, yes?  It really is simple. I know because I’ve done it and I’ve studied banking for about the last 30 years.  It’s a nice simple business.

Well, that was before we let bankers go wild and try to act like something other than banks.  Now, I have no trouble with bankers offering different levels of interest rates or some various different banking products.  That means I’m okay that we don’t have Glass Stegall back at its full strength but basic bankers need to stick to basic banking because banks have what’s called a fiduciary responsibility.  That means every one trusts banks with their money.  Bankers are not supposed to be casino operators.  They’re not supposed to have flashy carpeting, flashing, dinging machines, and their assets and liabilities shouldn’t resemble ponzi schemes.  Nice community and regional banking is a good and simple thing.  If you don’t want to take my word for it, then perhaps ex Fed Chair and rescuer of the country from the depths of inflation, Paul Volcker can convince you.  Too bad he isn’t convincing the Obama administration because they really need to be convinced.

This is from today’s New York Times.

Well, not lately. The aging Mr. Volcker (he is 82) has some advice, deeply felt. He has been offering it in speeches and Congressional testimony, and repeating it to those around the president, most of them young enough to be his children.

He wants the nation’s banks to be prohibited from owning and trading risky securities, the very practice that got the biggest ones into deep trouble in 2008. And the administration is saying no, it will not separate commercial banking from investment operations.

…

Mr. Volcker’s proposal would roll back the nation’s commercial banks to an earlier era, when they were restricted to commercial banking and prohibited from engaging in risky Wall Street activities.

The Obama team, in contrast, would let the giants survive, but would regulate them extensively, so they could not get themselves and the nation into trouble again. While the administration’s proposal languishes, giants like Goldman Sachs have re-engaged in old trading practices, once again earning big profits and planning big bonuses.

Mr. Volcker argues that regulation by itself will not work. Sooner or later, the giants, in pursuit of profits, will get into trouble. The administration should accept this and shield commercial banking from Wall Street’s wild ways.

“The banks are there to serve the public,” Mr. Volcker said, “and that is what they should concentrate on. These other activities create conflicts of interest. They create risks, and if you try to control the risks with supervision, that just creates friction and difficulties” and ultimately fails.

The only viable solution, in the Volcker view, is to break up the giants. JPMorgan Chase would have to give up the trading operations acquired from Bear Stearns. Bank of America and Merrill Lynch would go back to being separate companies. Goldman Sachs could no longer be a bank holding company. It’s a tall order, and to achieve it Congress would have to enact a modern-day version of the 1933 Glass-Steagall Act, which mandated separation.

Glass-Steagall was watered down over the years and finally revoked in 1999. In the Volcker resurrection, commercial banks would take deposits, manage the nation’s payments system, make standard loans and even trade securities for their customers — just not for themselves. The government, in return, would rescue banks that fail.

Nobel Prize winning economist Joseph Stiglitz agrees with Volcker. Even Ex Fed Chair Allan Greenspan–while not in favor of bringing back any version of Glass-Steagall–believes large banks should be broken up.  So, why isn’t this administration listening?

Interestingly enough, the same kinds of calls are going on in the U.K which is another country hard hit by the excessive speculation in financial markets.  A governor of the Bank of England, Mervyn King, has also called for breaking up big banks and separating investment banking from plain old vanilla banking.   This is from the FT.

The Bank governor wants to see the utility aspects of banking – payment systems and deposit taking – hived off from more speculative ventures such as proprietary trading. “There are those who claim that such proposals are impractical. It is hard to see why,” he said.

Although he said that ideas to force banks to hold debt that automatically turns into equity in a crisis were “worth a try”, he played down their likely effect. ”The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion”.

These old time bankers want to put the boring back in banking because of the public interest.  There is an aspect to banking that cannot be removed from public welfare.  The first, of course is the fiduciary responsibility.  Banks hold peoples dreams’ in the form of funds and that’s a big responsibility.  They lend to future entrepreneurs and they borrow from savers with dreams of retiring, vacationing, or funding their children’s futures.  Holding savings and making Loans are the  lifeblood of a market economy.  If banks don’t lend to small businesses but choose to do risky but less effortless paper arbitrage, it stops money from flying through the economy.  Synthetic financial deals do nothing in the real economy.  No jobs are created. No widgets are manufactured.  If there’s a bubble, it bursts and takes saver’s money with it.  But the bankers, they get to churn up fees and bonus schemes in the meanwhile.  They also, through securitization, have no real incentive to do anything but pass trash.  They do not do due diligence because they don’t have to live with their bad decisions.  They may even cheat on the paperwork and it is very hard to inspect in quality or catch after the fact finagling.  No oversight regulations will be tough enough to ensure that bubbles will not be created and trash will not be passed.  It’s better just to put the boring back into banking.

Why, oh, why don’t we have a real democratic administration and congress that is intent on protecting such an important part of the economy?  Why are they so interested in perpetuating Casino Banking?

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If your answer included any of number regulators or congress with its oversight duties or the traditional media with its watchdog of the public duties sorta answer, that would be a wrong answer. There were so many articles today about past and present Wall Street tomfoolery that I almost forgot to check the Wall Street Journal or The Hill.  Instead, I”m relying on my subscriptions to things I’m supposed to be reading in the bath tub with Chopin playing in the background and a glass of Pinot Grigio nearby.  Today, the best read came from Vanity Fair and was written by Andrew Ross Sorkin.  (My Vanity Fair showed up today along with my latest copy of The Economist with the cover shouting “After the Storm: How to make the best of the Recovery.” ) My bottom line is still that Wall Street caused this and they are not only NOT cleaning it up, they are not being cleaned up.

I’m also checking out Matt Taibbi and TaibBlog now that his infamous vampire squid article in July’s Rolling Stone defined the shadowy world of Goldman Sachs better than just about any thing I’ve recently read.  Matt’s blog today takes on naked selling or ‘naked swindling’ in the succinct framing of the Wall Street Deal that I now consider better  jargon than that of the derivatives blah blah blah that I was taught in any of my PhD level corporate finance or investment classes.  I may be able to do the proof for the Black Scholes formula but I will never be able to prove its social usefulness.

Actually, this takes me back to the Grey Lady and my first read of the day about the now bankrupt Simmons Bedding company that was the cash cow purposely inflicted with mad cow disease. Now days, it’s still more about the arbitrage deal and the leveraged deal that produces dividends than it is about what a company produces and the lives of the workers and long time managers who produce valuable stuff.  It’s no longer build it and they will come.  It’s leverage it to the hilt, take your dividends now, and find the next sucker with the next model that can hyperactivate the milking machine.  It’s another real life example of Gordan Gekko and the greed is good speech.   Spend some time with the Simmons story before you hit Taibblog and definitely the Sorkin article in Vanity Fare.  It’ll put you in the right frame of mind.

The Sorkin article in Vanity Fair is excerpted from his new book “Too Big to Fail” due out shortly.   We know the players.  A year after the Lehman meltdown, we know them as well as we’ve known any two treasury secretaries since Alexander Hamilton and any Fed Chairman.  The drama is palpable and the scent of desperation in the actions of grumpy old white men can’t be be missed. This should’ve been the Waterloo of the investment bank and the hyperleveraged deal.  Instead, they’re at it again, big time, and tucked behind the tax payer funded, cozily regulated world of the staid traditional banker with money so cheap that it shoulda come from eBay or your neighborhood Dollar General.

The bomb didn’t explode then.  It’s just been reset to go off at a later time with the infusion of hard earned dollars of the American taxpayer and the jobs of 10% of the American labor force that is facing some of the worst job market numbers ever while the curtain folds on their American Dream.  We still got naked short sells.  We just are short of about 15 million jobs.

These are the same folks that every one trusts with the insurance policies also.  Why are we tolerating this like a herd of narcoleptic sheep?

Paulson knew this was his financial panic. The night before, chairman of the Federal Reserve Ben Bernanke had agreed it was time for a systemic solution; deciding the fate of each financial firm one at a time wasn’t working. It had been six months between the implosions of Bear Stearns and Lehman, but if Morgan Stanley went down, probably no more than six hours would pass before Goldman did, too. The big banks would follow, and God only knew what might happen after that.

And so Paulson stood in front of his staff in search of a holistic solution, a solution that would require intervention. He still hated the idea of bailouts, but now he knew he needed to succumb to the reality of the moment. “The only way to stop this thing may be to come up with a fiscal response,” he said.

Well, that is the drama and the players who strut on the stage fretting away their precious few hours.  Behind the scenes there is this explained by the likes of Matt Taibi on his blog in a video.

This doesn’t sound all that dramatic and as video sequences go, it sure as hell isn’t the Paris Hilton sex tape. But this is an example of how naked short-selling can happen. If you don’t need to actually find the stock before you sell it, there’s no real brake on speculative naked short-selling. If a clearing firm will give you a locate no matter how big your request is, there is no real barrier out there to stop this kind of activity.

Why does this matter? Let’s say there’s a big company that is coming under attack by short-sellers — let’s take Bear Stearns for example. Let’s say it’s March 11, 2008, and Bear stock is trading at $62, but dropping. Once the run begins and the stock price begins to fall, you might see day traders piling on. If they don’t need to actually locate Bear stock, they can simply sit there and batter the hell out of it all day long by continually selling short without locating the shares first.

The best explanation I’ve seen of this problem comes from John Tabacco, the founder and CEO of Locatestock. Full disclosure: Tabacco’s company offers services designed to avert the problems of naked short-selling by using a new technology (invented by Tabacco) that provides real and legal locates to traders. So he has a financial interest in outlining these problems. He’s also a garrulous right winger who has a Sean Hannity-style TV show and probably doesn’t agree with me about anything outside finance. But he’s a great guy and has taken a lot of time to talk to me about Wall Street in recent months.

Tabacco gave a speech about this issue back in April in which he talked about the effect of day traders repeatedly hitting a stock without locating the shares first. He speculates that some of this played a role in the Bear and Lehman episodes, among others.

“The more artificial intra-day selling pressure is impacted on a single stock, the more the pool of real shares is diluted,” he said. This, in turn, creates a “cyclical spiral” in which the issuer’s “real shares are detrimentally harmed, and in some instances that we’ve seen lately, beyond repair.”

Or you can read Naked Capitalism with today’s big Question:  Why is Goldman allowed to game the system? OR for that matter you can look into how we were gamed by the folks out there paid to protect us.  This is from ABC:   Government Watchdog Says Treasury and Fed Knew Bailed-Out Banks Were Not Healthy: Senior Officials Had Financial Concerns About Nine Bank Institutions Receiving TARP Funds.

Neil Barofsky, the special inspector general for the Troubled Asset Relief Program (SIGTARP), says that despite multiple statements on Oct. 14 of last year that these nine banks were healthy and only receiving government funds for the good of the country’s economy, federal officials knew otherwise.

“Contemporaneous reports and officials’ statements to SIGTARP during this audit indicate that there were concerns about the health of several of the nine institutions at that time and, as detailed in this report, that their overall selection was far more a result of the officials’ belief in their importance to a system that was viewed as being vulnerable to collapse than concerns about their individual health and viability,” Barofsky says.

Then  riddle me this,  why is all the real news coming to me via The Rolling Stone and Vanity Fare?  Meanwhile, look over there … Rio’s going to host the Olympics while I’ll be eating at the restaurant at the end of the Universe.  Oh, and did I mention that Letterman abuses his celebrity and status to sleep with interns?  Wanna see some REAL extortion, go read the Sorkin article.

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Gay-Lussac

The pressure of a fixed mass and fixed volume of a gas is directly proportional to the gas’s temperature.

This relationship is known as the Gay-Lussac’s Law and a pressure cooker is an example of the law in practice. Cooking under pressure creates the possibility of cooking with high temperature liquids because the boiling point of a liquid increases as its pressure increases. High pressure and high heat can result in delectable dishes.

Cooking under pressure can be also dangerous because as liquids change phase into gases their volume expands greatly. For example, at atmospheric pressure the volume of steam is about 1700 times greater than the volume of water. To prevent pressure cookers from becoming bombs, relief devices (pop safety valves) are employed that are capable of relieving all of the steam the vessel is capable of producing.

America the Beautiful Pressure Cooker

The political pressure cooker is beginning to heat up. The power brokers and institutions that drive the nation have arrived unannounced on the doorsteps of America like a gaggle of unwanted, high maintenance relatives that demand hospitality for an unforeseeable time and that won’t take no for answer. Furthermore, they’ve announced that more relatives are on the way. Whatever plans America’s householders had, they’ve just gone out the window, with their household budgie and the relatives’ cat in hot pursuit.

People are justifiably angry with this incursion. Their budgie might not have been much, but it was “their budgie”, nurtured from birth into what it had become. Justifiably angry householders are trying to work out why the relatives arrived on their doorsteps and why they brought their fucking cat.

Common Sense

Common sense, in everyday use, is thought of as something that everyone ought to know. Will Rogers notes the problem with this view.

I dont know why they call it common sense. If it was so common more people would have it. (h/t Tom in Paine)

Rogers knew, like most of us, that common sense notions have to be learned and, often, taught. For example, that most flames burn we can learn by experiencing being burnt. We learn morals by having our families and communities teach us, by calibration, how we ought to act.

Sometimes we encounter others that do not share our moral view. How ought we to treat those who do not share our common sense?

The sensus communis

Acknowledging that there are different ways of seeing a thing, broadly conceived, is a first step in allowing that some of those other ways of seeing might have legitimacy. This acknowledgment is embodied in the Roman notion of the sensus communis (there is more than one notion). In the Roman notion, common sense is seen as the sense of the commons, which means that the sensus communis encorporates every view on every thing that each member of the community holds. It is like the opposite of how we use common sense because our use means there is only one right way to view a thing. Their view is like a warehouse or a purse, where everyview is stored because it might become useful some day.

This Roman notion is conservative in bold letters. It is practical because it recognizes that the vast majority of us can see something the same way and be wrong. If everyone held only one view, then what options would we have if we find we’ve got it wrong? (Nature abhors monocultures, for the most part.) By conserving alternate views we have a ready set of options to try, if our accepted wisdom turns out to be unwise.

The sensus communis and the pressure cooker

How does this relate to the pressure cooker? Somehow the power brokers and institutions that drive the nation, through their understanding and manipulation of the relatives/variables in the formulae by which they mathematically model the world, got some things wrong. They sent these relatives to the nation’s doorsteps. The relatives are eating the householders out of the hold they have on the house. The householders want the power brokers and institutions to do their jobs and send the relatives on their way.

Unfortunately, that’s easier said than done because it’s difficult to sort out all of the causes of the problems and the likely solutions. It’s made worse by those who are trying to cover the tracks of the relatives on their way to the households. It’s made even worse by those who are trying to say that it’s the neighbors who are the problem, not the relatives.

All in all, there is a nation full of justifiably angry householders using their received wisdom to make sense of the information they are given, contrary interpretations abound, and the temperature and pressure are building as the opposing views run into each other at ever increasing pace while the larders getting smaller, and so on. What can be done to turn down the heat before the pop safety valve is tested and/or fails?

Pop Safety Quiz

Ralph B might say something like we ought to be ready to do more listening and less talking at. He’s right. Myiq might say we ought not to suffer fools lightly. He’s right. SoD might say we ought to stop mooning idiots. She’s right. Dakinikat, in her role as the Cajun Quincy of finance, will do the economic forensic work and reveal the culprits, and then say we ought to challenge our assumptions about what’s right. She’s right. Riverdaughter might say it’s time to unwind and tend to soothing thyself for a while. She’s right.

I think we are all right. Booman’s right. Cannon’s right. Lambert’s right. Jeralyn’s right. kevin k is r.. r.. right. Murphy is right. Paul Lukasiak is right. Lawnguylander is wrong.

We are also wrong because our remedies are unlikely to be suitable for each and every situation. That’s not a matter of fault; it’s simply a matter of fact because none of us has a God’s eye view. In other words, our degree of rightness and wrongness depends on the fit of our imperfect knowledge to the situation at hand.

That we are fallible should make us act with more humility, however, in the real world humility tends to suffer under power. This is one of the reasons I like to humble power. It’s why I’m often humbled. This said, it’s easy to misidentify the problem or choose the wrong solution. It is the human condition.

What should we do if the heat is too high and we’re overcooking the dish?

What ought we to do to lower the pressure? If you think lowering the pressure is what we ought to do, and you are not sure of how to act, then I recommend searching the sensus communis for whatever answers you think best explain the situation, especially those that appear to offer effective prescriptions. This said, to make a tasty dish out of the “goods” we’ve been given is going to take some heat and some pressure. If we can get the temperature and pressure right, hopefully we can create a dish that is suited for most diets and palates.

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